3 Types Of Foreign Direct Investment

3 Types Of Foreign Direct Investment

Foreign Direct Investment, or FDI has so far proved to be the best way to boost a developing nations, such as India’s economy, by bringing in new and improved technologies, highly skilled resources, employment opportunities, growth in the overall GDP (Gross Domestic Produce), and most importantly the extensive funding.

They are known to bring in huge investments thereby, helping the local businesses to flourish and help them increase the exports of the country and even stabilize the forex rates.

Thus it is claimed to be extremely beneficial for any growing economy, where the developed economies come and join hands with the host country and have the managerial control over the stocks of the business in which they are investing.

In this article, we will learn what are the various types of FDI in India a little bit more in detail as you read along.

Types Of FDI

Strategically, there are 3 main types of FDI that help the investors find the right investment option for themselves, namely:

• Horizontal FDI
• Vertical FDI
• Conglomerate FDI

Let us see what they actually are in detail as mentioned in the upcoming paragraphs.

Horizontal FDI

A Horizontal FDI is an investment made by the investing company, firm or organization in the same type of operations, activities and tasks that it carries out in its home country.

Which apparently means, the foreign investors are investing in the same industry segment albeit, operating in two different nations.

To state an example, take a smartphones manufacturing company from the USA that assembles its smartphones even in India.

Vertical FDI

In the Vertical type of FDI, the investment is made by the investing company or organization into a field that is related to its field of operation. Thus basically these are nothing but the value adding activities of a business.

For example, an investor belonging to the frozen food sector ties up and invests in a food container manufacturing company of the host country like India.

The Vertical FDI is further classified into two basic types such as:

Forward Vertical FDI:

In these types of Investments, the investor invests in the company of the other (host) country, which bring the manufactured products and forward them to the target audience of that country, for example, a smartphone manufacturing company from China investing in a wholesale smartphone dealer in India.

Backward Vertical FDI:

In these types of Investments, the investor invests in the organization or company of the host country, where the company is involved in the raw material manufacturing or related sourcing of products of the particular industry; for example, a smartphone manufacturer in China invests in a gorilla glass manufacturer in India.

Conglomerate FDI

In the conglomerate FDIs, the investment is made in unrelated business sectors in the foreign country in which the investing company, individual or organization has never ventured before. Here the investor usually has two important benefits, one is working in a new segment of industry altogether and secondly attaining managerial control of business operations in a foreign land. For example, a smartphone manufacturing company in Australia investing in a durable good producer in India.

Apart from these, the FDIs also take the form of:

• Greenfield entry and
• Mergers & Acquisitions (takeovers)

What are they?

Greenfield Entry:

A principal mode or a special type of FDI, the Greenfield entry is the investment made by the investor (company, individual or organization) in a foreign company that assembles or indulges in the activities from scratch production and this is extremely beneficial in developing countries like India.

Mergers And Acquisitions (Takeovers):

Well, when an investing company or organization invests in the already existing businesses or a fully operational company in the host or foreign country, then it is called the Merger and Acquisition or basically the foreign takeover.

These above-mentioned types of FDIs offer various opportunities to the several foreign investors to choose one of their favored types of investment depending upon their overall interest, ownership strategies, and capabilities.

Investors have to keep themselves abreast of the latest trends in the global market and what type of FDIs their competitors are choosing and why. This will help them gain new market access and venture into fields where they have never been before through the foreign investments.

Author Bio: I am Pooja Tyagi, a professional writer, and a freelance blogger for the past two years. I've spent my professional years curating content for many websites across a wide range of topics like health, education, finance, travel, technology, fashion and many more.